Apologising to Simon Wren-Lewis and Nick Rowe

This is probably going to be my last post on the philosophy of economics. Some recent events have led me to reassess my priorities.

I’m not abandoning politics or economics. I would just rather use this blog to write about the history of logic, and philosophy more generally. That fits my title better anyway. I’ve also come to the unwelcome conclusion that I’m quite bad at economics, whereas I have to hope that I’m not a terrible historian of philosophy.

What I’d like to do here is concede how much I now think I was wrong about and how much Simon Wren-Lewis was right about. A lot of this also applies to Nick Rowe, who has also been kind enough to engage with me over the last year or so.

First, I think that Wren-Lewis was probably largely right about MMT. His complaints were directed against the hard core of MMT supporters online, not the actual developers of the theory. He had two complaints:

  1. MMT seems obsessed with the accounting detail of government transactions
  2. This seemed to lead to ideas that I thought were standard bits of macroeconomics

Now I think both complaints are quite fair, again if applied to the MMT fan base online rather than to Mosler, Kelton, Wray, Mitchell, Tcherneva, and the rest of the proper MMT theorists. In the blogosphere, I would add that they don’t apply to people like Eric Tymoigne, Brian Romanchuk, and Neil Wilson.

Let me say something, however, about “standard bits of macroeconomics”. Wren-Lewis later pointed out that he is writing about “a world where monetary policy did successfully control demand and inflation”. That is the world of mainstream macro. And he is absolutely right that in that world – given that premise – all the accounting details in the world don’t show his story to be deficient in any way.

In that world, fiscal policy is neither needed nor effective as a macroeconomic stabilisation tool. It is not needed, since by definition demand is managed by monetary policy. And it is not effective, since monetary policy will just adjust to counteract any effects of fiscal policy on demand and inflation that diverge from its targets.

The logic here is faultless. But I, like many others, fell into the trap of trying to pick holes in it by way of facts about accounting. The truth is, if there is a problem with what Wren-Lewis says, it is not with the internal logic of his model; it is with its applicability to the real world.

What Wren-Lewis didn’t know about MMT, and couldn’t have known given the typical comments on his blog, is that it takes for granted a belief (implicitly founded I think on Post-Keynesian microeconomic theory) that interest rates just don’t work the way that they’re assumed to work in standard economics. This was then pointed out to him; he acknowledged it and then implied that it seems to be belied by the empirical evidence.

Again, the proper MMT reply here is subtle. The point is that even if monetary policy does work in the way presumed, it can have terrible unforeseen consequences. Another part of MMT that Wren-Lewis couldn’t possibly have seen (because nobody showed it to him) is its dependence on a Minksyan theory of financial instability: if loose monetary policy works to increase demand, for instance, it also increases instability in the financial markets, because those markets are inherently unstable. Randall Wray’s recent book on Minsky makes this case with admirable clarity.

The proper answer to Wren-Lewis, then, is that he should not be writing about a world in which monetary policy succeeds in controlling demand and inflation. Even if monetary policy is able to do that, the cost is too high: it sets up the conditions for financial collapse. But proving this requires an awful lot of Minskyan and Post-Keynesian theory, about how market signalling doesn’t work in the way assumed, about how people are not rational in the textbook sense, about how prices are largely set through convention rather than through competitive pressure, and so on. In other words, digging below the macro and into the micro is the only way to prove the case against mainstream macro.

What does not work is repeated assertions about the way that government spending works. Wren-Lewis gets this absolutely right. Such facts might be surprising to the general public and probably many micro- and applied economists. They undermine what he calls “mediamacro”. But they are not surprising to macroeconomists. MMTers are wasting an awful lot of time and energy on pointing out such facts when what they need is to promote the pricing theory, capital theory, and theory of financial instability that underpins their fundamental claims.

Again, let me be clear. The main MMT theorists have been making this case for a long time. And they are trying to get it out into the public; just look at Eric Tymoigne’s recent blog series on money and banking. But it hasn’t sunk in with the online MMT fanbase, who still think the problem is that macroeconomists don’t understand government accounting.

I know this because I made the same mistake myself for a long time. The trouble, I think, was that I wanted to have something to contribute to the conversation, and price theory, capital theory, and theories of asset pricing are really beyond my understanding. Accounting I do understand, and so I hoped that that might be enough to make the case for what I believe on instinct. I think a lot of others in the MMT fanbase fall into the same trap. But it is a trap.

I still believe the same things about policy – again, largely on instinct. And I do think that philosophy is useful in terms of clarifying concepts and arranging our moral and social priorities. I also still think that there is an interesting political philosophy contained in MMT that deserves more discussion. But frankly I lack the expertise to make the case I wanted to make. Luckily there are others to do so, but no intellectual shortcuts please. All excellent things are as difficult as they are rare.


28 thoughts on “Apologising to Simon Wren-Lewis and Nick Rowe

  1. NeilW

    Mainstream macro is the politics of the benevolent technocratic money lender and the pre-eminence of private access to resources over public.

    Perhaps it is actually politics you are not good at. In which case, welcome to the club.

    1. axdouglas Post author

      I think making the case for the public purpose is something I still would like to contribute to. That’s philosophy proper rather than economics (or politics, which you’re right I’m terrible at).

  2. Nick Rowe

    I will come back to this later. Just one thought now: you have ABSOLUTELY NOTHING to apologise to me about. You debated good, and made me clarify my own thinking, at least.

  3. Geoff Coventry

    Perhaps your experience in reading Mosler was like mine: that simple, non-academic book did more to shed light on the real world of macro economics for me than any econ textbook. I think the primary reason is that MMT builds upon a different foundation, the cornerstone of which is the state currency, and the structures are complex interactions of social institutions and private interests. In other words, the real world, not an imaginary one that starts with self-interested individuals and market exchanges.

    There is a great need for mainstream econ to engage with this perspective and to challenge their own representations of the world, at the very least in terms of how their models are used to influence policy, given how much harm has been done to society in the name of economics.

    I found this exchange to be exactly the kind of discussion we need more of, not less. I hope you’ll reconsider and stay the course 😉

    1. Stephen Ferguson

      Spot on Geoff. Its not just MMT vs the mainstream.There’s something very rotten in the state of orthodox economics when undergraduate students the world over are demanding pluralism of teaching – read ‘real world’ economics – instead of the monoculture of neoclassical economics…

      There’s a nice potted history here of how and why economics went wrong from 1960’s forward (from the Post-Autistic Economics Network)…

  4. Ralph Musgrave

    SW-L’s claim that MMT ideas are all in standard economics is probably true, strictly speaking. Problem is that “standard economics” contains an awful lot of BS, e.g. Ricardian equivalence, rational expectations, expansionary austerity and much else. The beauty of MMT is that avoids the BS.

    For an amusing slap down of some of the BS in standard economics, see this one minute video clip by Mark Blyth:

    I.e. SW-L’s claim is (to exaggerate) like saying that everything SW-L has ever said has been said before in some book in the British Library.

    Next, on the monetary versus fiscal question, SW-L is quite correct to say that given positive interest rates, fiscal policy alone can be used to adjust demand. But that ignores a whapping great elephant in the room, or put another way, it begs a huge question, which SW-L completely ignores, which is this.

    What’s the optimum rate of interest? I’ll elaborate on that.

    As Warren Mosler and Matthew Forstater (MMTers) argue in the article linked to below, it’s a bit hard to see the logic in the state or central bank issuing so much base money that the state then has to borrow some it back at interest so as to control inflation. I.e. as those two authors argue, the OPTIMUM rate of interest is zero.

    Moreover, the fact that some tool CAN BE USED to achieve something does not mean it is a GOOD tool, and in fact there is a glaring and fundamental flaw in using interest rates to adjust demand. It’s this. Given inadequate demand, whence the logic in feeding extra demand into the economy JUST VIA extra borrowing, lending and investment rather than via more spending on ice cream, lollipops, education and whiskey? There is no obvious logic there that I can see.

    Next, Alex claims that fiscal policy is “not effective, since monetary policy will just adjust to counteract any effects of fiscal policy on demand and inflation that diverge from its targets.” That’s Scott Sumner’s so called “monetary offset” argument in a nutshell. I find it a bizarre argument. I dealt with it here:

    Next, Alex claims that “….if monetary policy does work in the way presumed, it can have terrible unforeseen consequences.”

    Wow: that’s a bit strong! Also it does not sit easily with Alex’s claim a few paragraphs earlier in favour of monetary policy and against fiscal policy.

    1. axdouglas Post author

      You misunderstand me. I was not arguing in favour of monetary policy and against fiscal policy; I was presenting what I take to be Wren-Lewis’s arguments thereof. I don’t agree, but I think the internal logic is sound.

      The statement you find “a bit strong” wasn’t me expressing my own views either; it was me expressing what I take to be the view shared by most sophisticated MMTers. That one I do agree with, though certainly I can’t prove it or anything like that.

      1. Min

        Is the logic of monetary offset sound? (The politics is unrealistic, but that’s another question.) As Ralph indicates, we might get a kind of arms race, as the treasury prints money and spends it into the economy or gives it away to citizens, and the central bank drains money out of the economy, and then the treasury prints more money, etc., etc. It is important, I think, that the gov’t actually prints money instead of also draining money from the economy by borrowing an amount equal to what is spent. The central bank might try to drain money from the economy by raising interest rates in general and thus on gov’t bonds, but if the gov’t does not issue any bonds, how well will that work? The CB can charge interest on reserves, and drain money from commercial banks, but that would have repercussions. If the banks fail, what good is that?

  5. John Adams

    I agree with Nick, to use a line that seems from a distant age. There is nothing to apologise for. Your posts on economics have been superb. I’m halfway through your book The Philosophy of Debt, and it’s really excellent. Hoping you come back!

    Economics creates politics, and more importantly politics creates economics. These subjects are not value free. It’s not easy to find your way through this ever changing maze. Some at least make the effort, like the MMTers, PKers and institutionalists. Meanwhile, the mainstream inspects the loveliness of the green leaves on the hedges of the maze.

    1. axdouglas Post author

      I might have overstated. I do want to keep looking at this stuff from a properly philosophical angle. But I want to broaden out a bit, asking bigger questions about what the public purpose is, what we should want our society to be like, etc.

  6. Brian Romanchuk

    To be fair, it is not just accounting, there is the issue of the details of operations. Those operational details offered a lot more insight into how interest rates are set than most mainstream treatments (which is what initially attracted me to MMT). However, I would agree that some of the online lecturing was not particularly helpful.

    Best of luck in your future endeavours. I used to pay some attention to mathematical logic, but it’s been a long time since I looked at it.

    1. axdouglas Post author

      Thanks Brian. I very much hope that you keep doing what you’re doing. I admire your work very much and couldn’t hope to emulate it.

  7. Jerry Brown

    You are “bad at economics”??? Please point me to the people who have been good at it. Nick Rowe is completely right here- your debate was good and you owe no apologies. In addition, your writing is crystal clear and your logic is apparent to even (unintentionally) obtuse people like me. I very much hope that you reconsider about commenting on economics in the future.

    1. axdouglas Post author

      Thank you – that’s very kind of you. I honestly wasn’t expecting these reactions, so I will have to think about what I do in the future.

  8. Simon Fowler

    I hope you don’t stop writing about economics completely – I’ve greatly enjoyed your posts and they’ve expanded my understanding significantly (both from the arguments therein and from the links and discussions associated). Nothing against the history of philosophy, but it’s less interesting to me than your perspective on economics!

    I think part of the problem with the broader MMT “fan base” and the way they interact with mainstream economists is that a lot of what they’re railing against is the political instantiation of economics, which is often quite different from what (the saner parts of) mainstream economics argues. Simon Wren-Lewis may argue that many of the practical policy suggestions from MMT are supported by mainstream economics, but they still don’t get implemented at the political level. The (quite justifiable) response from supporters of MMT tends to be “if mainstream economics supports this, why the hell doesn’t it happen?”

    This gets back to your suggestion that MMT is as much a political philsophy as it is an economic school of thought. The non-economist layperson often seems to see it as a ray of light in the political darkness, because of its emphasis on a political philosophy that is so very different to the mainstream neo-liberal political philosophy. The conflation of mainstream academic economics with mainstream political economics is what results in layperson MMT supporters railing against the arguments of people like Wren-Lewis.

    As I said, I really hope you don’t stop writing about economics. But I thank you for the enlightenment your previous writing has provided, and I do look forward to learning more about the history of philosophy from your future writing 😉

    1. axdouglas Post author

      I think that’s exactly right. I suppose I’ve become despondent about having any effect on mainstream political economy, and I’ve realised I don’t have the expertise to discuss mainstream academic economics. But see my reply to Jerry; I need to think more about this.

  9. Min

    Now, it may well be that Simon Wren-Lewis, Nick Rowe, and others in the know know about the operational facts and accounting of MMT, but that does not keep economists and politicians with presumably knowledgeable economics advisors from uttering nonsense. Not too long after the recent financial crisis Paul Krugman said that the US gov’t was bankrupt. Later he said that he had been speaking metaphorically, but a public figure such as he should know that people would take him literally. President Obama said in a State of the Union address that people were tightening their belts, and that the gov’t should, too. (!) Larry Summers did not resign. Just last week I saw Deirdre McCloskey, who is both an economist and a philosopher, on CSPAN, and several times she talked about giving the gov’t money (!) and how that was not such a good idea.

    As for the efficacy of monetary policy, we now have several years’ worth of data which has failed to show that central banks are able to stimulate their economies without the aid of fiscal stimulus, nor have they been able to generate much in the way of inflation.

    1. axdouglas Post author

      Yes, I agree entirely with all of that. But I just don’t know what to do about people who disagree; they seem completely unmovable.

      1. grkstav

        So, their intransigence, their Ptolemaic cosmologist-like holding on to their model (see Steve Keen’s insightful and lucid lecture on the general topic) adding ad hoc upon sub rosa “twist” and further heroic assumption and data-massaging techniques, their ridiculous “rationalist” epistemology, etc, has made you despondent. Fair enough, there something to be said (nay decades worth of people-hours of empirical research and theorizing) for what you inelegantly labeled”cultish” behavior as an antidote: spend more literal and metaphorical time with “your people”, the ones who share the apparently novel doxa, build up your emotional reserves, do some (somewhat) false moral dichotomizing with them, etc.
        Or not. You may just longer feel “we” are “your people”. 😦

      2. axdouglas Post author

        That’s fair. I began to think that writing these posts wasn’t contributing very much, but I may have been thinking about it the wrong way.

    2. Min

      Correction. I meant to say that Krugman talked about the possibility of the US gov’t going bankrupt, not that it already was. As well as I recall.

  10. Hugo Evans

    Well, even if you think your initial approach was wrong, you’ve helped many people test and restructure their thoughts. And I think you’re too quick to withdraw from the immediate fray. You may be correct that neo- Keynesian thought has adequate defences to reduced form MMT criticism, but that was never what was at stake. Nor is a deep knowledge of post-Keynesian micro going to be totally effective . That Cinderella was uninvited to the ball decades ago. We need trained philosophers to identify fallacies lurking beneath the economics, such as model Platonism, Pythagoric snares etc.
    So please keep posting.

  11. Jim Whitman

    Hi Alex
    I’ve come late to your writing and this blog, but find the discussion very helpful because it has quality & the world gets arid very rapidly outside of what’s still only a small group (small to me particularly) of people talking about PK economics & politics. I’m not an academic. Sensitivities to academic slights aren’t funny, I guess, & I can see feathers ruffled at times. I’m fascinated by what’s presented as (exaggeratedly on my part) hordes of mmt-followers leaving crisp packets and pop cans strewn all over the grass, in a public park, in which there are no keep off the grass signs.

    How could there be? This is public land and a commons of public use. What are people gathering in this park saying that’s so bad?

    If it’s ‘mainstream economics failed so what can they now say that could possibly be right’ then that seems a powerful well evidenced proper public political sentiment. You can historically correctly ask how you can wage war (WW2) creating huge public deficits, then run full employment & a welfare state, and then suddenly switch to Thatcherist austerity & public asset sales and be right about the need to force through cuts to attain a govt surplus. Strikes me a bit of howling down from the masses is a healthy political sentiment particularly given the huge inequality that has emerged.

    So, don’t lose confidence. You are doing things your way. Fine.


  12. Pingback: Some explanation on my last post | Origin of Specious

  13. mrkemail2

    You have nothing to apologize for.

    To put in simply, economics is about allocating scarce real resources. The assumptions of neoclassical economics about methodological individualism, rational optimization aka max u, general equilibrium based on spontaneous order arising from market forces is bonkers because it also assumes no asymmetries regarding power and influence, and knowledge, and it also ignores the role of finance. Conventional economics assumes that money is basically irrelevant even though allocation of resources in markets is mediated through prices.

    It’s just totally ridiculous and only morons or people trying to dupe others by concealing foolishness behind a veil of gibberish, like medieval priests did their theology with Latin, would involve themselves in this. Ofc, some would do it just because of the money and prestige, knowing it’s all BS. That’s intellectual and professional prostitution.

    This is not just an academic issue since economics is policy science that is related to just about everything else important in one way or another. Often economics is used to justify policy choices in other areas.

    The direction of change now obviates passivity as a realistic option. It’s time to say Enough already! It’s going to take a lot of people screaming loud enough to be heard before the economists and politicians drive this train over a cliff again.

    There is not way to model a real economy formally the way they are trying to do iaw Samuelson. It’s not possible owing to ergodicity (Paul Davidson). They cannot define capital operationally (Cambridge Capital Controversy).

    Their ploy in arguing is, “What’s your alternative, and “What’s your model,” meaning that only one method in economics is acceptable, theirs, and if you can beat them at their own game with rules of their choosing, you aren’t in the game and are not worth listening to. That’s not an argument. It’s quasi-religious dogmatism, or politics in which raw power rules. It’s anti-science.

    There is no sense arguing with them anymore. They need to be ridiculed for their failures and the messes they have created, not to mention serving the interests of their masters for pay and prestige. They are shills and prostitutes. Or they are morons. In either case, they should just be shown the door.


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